I received an email on my quest to find the real answers to the incessant question of how a foreclosure vs. short sale vs. deed in lieu all affect the credit report of the borrower.
The email I recieved was from the President of a Florida credit counseling service and it was a response to my request that he review the previoius blog posting on How Does a Short Sale Affect Credit Scores.
Here is the crux of what he said:
What you stated in your blog and the question that you posed seems right on target. What we have found in counseling, educating and assisting consumers in making decisions on how to proceed when they're either facing a choice at the end of the month as what to pay (as they can no longer pay both their new mortgage payment and their other financial obligations) or are looking to pick up the pieces of their life after a foreclosure is that it is on a case by case scenario. Taking each individual's or family's circumstances into account along with the policy of each lender as to the flexibility that they have in resolving a delinquent account or how they treat a short sale or deed in lieu.
We have found that prior to a foreclosure, all of the solution oriented options are on the table. Utilizing a holistic approach and having a homeowner that is motivated to keep their home, we have found that there are alternatives and the lenders are cooperative so everyone is whole at the end of the day. If it must go in the direction of a short sale/deed in lieu/foreclosure it really depends on the policy of the lender as to how it is treated, forgiven, reported and the resulting blatancy of the derogatory.
We have experienced the full spectrum from a deed in lieu being totally forgiven and not reported to credit reporting agencies to a consumer being not only reported to credit bureau but getting a tax statement as well for the difference being treated as taxable income to the ex-homeowner as a result of the deed in lieu or the short sale and what was really owed to the bank. Either way, it is not favorable if it is reported as forgiven or settled. A foreclosure is of course a major derogatory but just like bankruptcy or anything else, it really comes down to successes and payment activity of the individual/family after the disaster and the policies and tolerance of the respective bank/lending institution.
The key here has two locks -- one is the TYPE of action taken which will in turn relate to the credit ding. The other is FOLLOW UP or post derogatory actions and history maintained by the borrower.
Comments are welcome and encouraged!!!!
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales
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Thanks for this explanation.
There is, however, still a question of financial consequences. A client of mine told me he is not going to do the short sale, but rather let it go into foreclosure. When I asked him why, he explained that if he chooses short sale, and he did not have the property as primary residence, then he would get 1099, and IRS would tax him for the difference, and this money you have to pay, while with foreclosure you get the judgement and the collection, but if it can't be collected, he is not going to jail.
Is that really true?